Moneycontrol Pro Panorama | FPI Exodus: The 2025 horror show

Foreign investors sold equities in 8 of the 12 months, with January proving particularly brutal

Dear Reader,

India's robust economic growth story hit an unexpected roadblock in 2025 as foreign portfolio investors (FPIs) recorded their highest-ever equity selling, totalling $18.4 billion through mid-December. This surpassed the previous peak of $16.5 billion in 2022, marking a dramatic reversal for a market that had consistently outperformed emerging-market peers since 2021.

The exodus has been relentless and broad-based. Foreign investors sold equities in 8 of the 12 months, with January proving particularly brutal, as they offloaded shares worth Rs 78,027 crore. As a result, FPI ownership in NSE-listed companies plummeted to 16.9 percent in the second quarter, the lowest level in over 15 years, while their stake in Nifty 50 companies slipped to a 13-year low of 24.1 percent.

Several factors converged to trigger this unprecedented outflow. India found itself caught in what market experts termed a "funding trade" for Asia's artificial intelligence boom. As Chinese and South Korean equities, particularly semiconductor and technology stocks, rallied sharply on AI optimism, investors pulled money from India to fund these opportunities. The MSCI India index returned a mere 2.5 percent in dollar terms compared to 27.7 percent for the broader MSCI Emerging Markets index—India's weakest relative performance since 1993.

Beyond portfolio rotation, fundamental challenges emerged. Corporate earnings disappointed consistently, with revenue growth for the top 3,000 listed companies sliding to a 7-quarter low of 3.4 percent.

The Reserve Bank of India's tight monetary policy stance compounded the problem. Despite inflation falling to decade lows of 0.25 percent year-on-year in October, the central bank maintained the repo rate at 5.5 percent, keeping real interest rates uncomfortably high. It was only in the December policy that the repo rate was cut by 25 bps. This dual fiscal and monetary tightening led to slower credit growth and warnings of weakening bank asset quality, further deterring foreign capital.

Adding to the pressure, the Indian rupee became the worst-performing major Asian currency in 2025, weakening past 90 to the dollar — a 5 percent decline that amplified losses for dollar-based investors. Concerns about higher US tariffs added to the uncertainty for India's export-dependent sectors.

Despite the gloom, domestic investors emerged as the market's saviour. Mutual funds, systematic investment plans, insurers, and pension funds poured in Rs 4.7 lakh crore — absorbing most of the foreign outflows and preventing a market collapse. Inflows attributable to domestic institutional investors now outpace FPIs for the fourth consecutive quarter while combined household ownership through direct and mutual fund investments reached 18.75 percent, the highest in 22 years.

Looking ahead to 2026, optimism is building. Multiple brokerages, including Jefferies, HSBC, Goldman Sachs, and Nomura, have upgraded India to overweight, setting a Nifty target of 28,300 — implying 10 percent upside. Analysts believe that earnings have bottomed, with MSCI India earnings per share growth expected to accelerate from 8-9 percent to 13-14 percent, driven by banks, automobiles, and power sectors.

The case for recovery rests on several factors, such as valuations that have normalised after the sharp correction, with India's premium over emerging markets returning to historical levels. Most importantly, with India now the second-largest underweight in global emerging-market portfolios and only a quarter of global funds holding overweight positions, there's significant room for foreign investors to rebuild their positions.

As Chris Wood from Jefferies notes, India has become a "reverse AI trade" — a contrarian opportunity that could outperform if capital rotation away from AI-heavy markets begins. For Indian investors, perhaps the best hope for 2026 is a burst in the AI bubble, which could trigger a reversal in fund flows.

Investing insights from our research team

Hotel sector: IndiGo’s operational disruptions to have minimal impact

Hitachi Energy poised to leverage domestic energy upcycle

What else are we reading?

Moneycontrol Pro Market Outlook | Rupee weakness keeps market on edge

Why RBI is right to shut the Stablecoin door

Chart of the Day | The IPO illusion

CoalSETU to drive optimal utilisation of coal reserves

Mexico's tariff move — A wake-up call for India's trade strategy

The Eastern Window | India has emerged as a hot political issue in Bangladesh elections

Small Modular Reactors: Safer, not risk free

Why the ‘stablecoin supercycle’ could rewire banking (republished from the FT)

The four ‘O’s that shape a bubble (republished from the FT)

Vande Mataram debate highlights the need for constitutional protection of national symbols

Mirage of Critical Mineral Diversification: How re-export hubs quietly undermine India’s energy security

Revisiting the Economic Roots of Swadeshi: Legacy and misconceptions

Travel mayhem in peak holiday season: Why December is the month we travel most and relax least

The Mirage of Big Tech Investment in India: A closer look

Tech and Startups

GCCs increasingly rely on BPM partners for transformation, says Genpact

Technical Picks: IDFCFIRSTB, RAIN, HDFCAMC, BPCL

Shishir Asthana Moneycontrol Pro